Digital identity: an innovation driver for fintech

The technology revolution that financial services are facing nowadays is making a huge impact in our life. As today we can’t anticipate how Fintechs may evolve in the next future. 

Nevertheless, by taking a look the surrounding tech ecosystem, we can get some insights about it. Thanks to a research made by Osservatori Digital Innovation about digital payment landscape, within the tech ecosystem we can recognize three different drivers of innovation: 

1. Enabling technologies: Open API, Artificial Intelligence, Instant Payments, Blockchain. These technologies allow banks and financial institutions to collect many insights on customer behavior and create disruptive offerings. 
2. Devices: Mobile, Smart Object, Smart Speakers. By combining financial services with new devices, the user experience can be renewed and improved. Check out this article regarding the relationship between banks and smart speakers.
3. Processes: Payment, Purchase, Authentication and Digital Identity. Checkoutless solutions or omnipayments instalments are revolutionize the way we purchase goods. In the meanwhile, digital identity can be seen as an accelerator of all of these drivers we just mentioned. 

According to Hong Kong University, there are four main types of identity: 

• Your fingerprint, your iris and DNA represent your physical identity;
• Documents such as passport, ID or driving license represent your legal identity; 
• Your presence in a social network such as Twitter, Facebook and Instagram are your electronic identity; 
• The way you talk, walk, interact with other people represent your behaviour identity. 

If physical and legal identities can be acknowledged as static identity (because they can’t be modified in any way), the electronic and behavioural identity can be acknowledged as dynamic identity, because they may vary depending on external and internal factors. 

Usually, when a customer is interacting with a classic financial institution, a bank, for example, the only way the financial institution is able to recognize him is through his physical and his legal identity. 

This framework may not work in the context of developing countries. In these countries, people don’t necessarily have an id that show their identity. This lack of legal identity affects the possibility of these people to enter in the financial service industry and be part of the economy. 

Owning a passport looks like a privilege in developing countries. That’s not the same for western countries. 

Let’s bring up the example of Aadhaar. Aadhaar is a programme launched by the Indian government in 2009, with the aim to give a unique ID number to all residents of India, and link it to biometric and demographic data; during this procedure, Indian citizens been recognized by taking scans of the 10 fingerprints, as well as an iris scan. 

To date, Aadhaar is providing 90% of the Indian population with a 12-digit number that allows them to be recognized anywhere within India. 

Thanks to the enormous database of individuals that Aadhaar has created, financial institutions decided to rely on it. Specifically, through the paperless KYC process brought by Aadhaar, which is called eKYC, Electronic Know Your Customer, citizens are able to send immediately their proof of identity and address directly to providers, like banks, in order to speed up and simplify their KYC process. 

                 Photo: Unique Identification Authority of India | Government of India

This is the case of Paytm. Paytm is the leading mobile commerce platform in India. Started by offering mobile recharge and utility bill payments, Paytm offers today a full marketplace to consumers on its mobile apps. With more than 300 million users registered and likely $20 billion transacted on the app, the company is pursuing a huge growth. As a consequence of the introduction by Aadhaar of eKYC, Paytm was able to scale very quickly, by allowing more and more potential customers to sign up to their mobile app. 

Aadhaar has a huge impact even in the growth of Digibank. DBS Digibank is the first fully digital bank of India, who reached 2 million customers in May 2018 and keeps growing at a very high level (about 100,000 customers each month open a bank account at Digibank). Thanks to the smoother KYC procedures offered by Aadhaar, Digibank is targeting 5 million customers by 2021. 

Would you ever thought that India could have brought such an innovation?

The ability to accelerating the development of financial services makes initiatives like Aadhar critical in the development of fintech. Being able to provide a digital identity to more than a billion people in less than 10 years was pretty impressive by this programme. 

Usually in the traditional finance system, company by themselves do their own checks/controls; instead, Aadhaar, through its centralized system, allows those companies to decrease the time and cost of onboard new clients. 

This example shows how western countries should learn how to improve their processes. Wouldn’t be nice to implement solutions like Aadhaar within the European Union? Would it make it easier to combat frauds and illegalities inside the financial ecosystem?